Trade, Politics Hurt CEO Confidence — And EPS By Extension

The third quarter of 2019 brought CEO confidence to a decade-long, recession-level low, according to a survey by The Conference Board.

Only 4% of surveyed CEOs expect economic improvements over the next six months. About 67% expect further deterioration. The pessimism carried over into industry outlooks, with just 13% anticipating improvement and 56% awaiting declines.

CFOs have similarly dour sentiment. A CFO survey by Duke University and the CFO Global Business Outlook revealed broad expectations for a recession by next November.

“Business optimism has not been this low since September 2016, a time when the unemployment rate was 5%,” John Graham, Duke University finance professor and director of the survey, said in a report.

“Optimism is low in all regions of the world, which exacerbates any slowdown occurring in the U.S.”

The Factors At Fault

The cycle of low confidence and poor performance begins with U.S. policy.

“Tariffs and trade issues, coupled with expectations of moderating global growth, are causing a heightened degree of uncertainty,” Lynn Franco, senior director of economic indicators at The Conference Board, said in a press release.

CEOs are rattled by a slowing U.S. economy, which faded from last year’s 2.9% growth rate to this year’s 2.3%. It’s expected to drop to 1.7% next year.

Political uncertainty is also to blame. Companies are waiting for clarity on Brexit, the 2020 presidential election and the impeachment inquiry into President Donald Trump before advancing their plans.

How Businesses Are Responding

Uncertainty breeds caution.

“As a result, more CEOs than last year say they have curtailed investment,” Franco said.

This year, 21% of CEOs reported reductions in capital spending — a sharp rise from last year’s 10%.

Low confidence has also hampered buybacks. Last year, U.S. companies spent more than $800 billion on stock repurchases, and 30% of S&P 500 spending supported buybacks.

Experts suspect those rates have declined. Goldman Sachs forecast just $700 billion in buybacks in 2019 and $675 billion in 2020.

What It Means For Shareholders

Fewer buybacks could mean rougher market prices. Companies have often used share repurchases as a stock stabilizer to buffer pullbacks and smooth out declines.

“The corporate buyer has been willing to step in, and I think that’s definitely supported share prices in a significant way,” Lori Calvasina, head of United States equity strategy at RBC Capital Markets, told The New York Times.

Buybacks also have the effect of boosting earnings per share, which keeps investors happy and stocks afloat.

“If you didn’t have buybacks coming in and supporting the earnings-per-share growth, you’d probably be looking at some slight declines,” Calvasina said.

“It’s sort of kept you in slightly positive territory on earnings growth, and it’s also just supported share prices when they’ve been willing to step in and buy.”

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